5 Earnings Stocks for Selective Traders - 5653 views

MINNEAPOLIS (Stockpickr) -- There is no sense trying to sugarcoat the moment: This is a very difficult market to navigate. Just when we thought the all-clear was coming after five straight days of gains, the market gives it all back in two short, brutal down days.

The trigger for the move last week was the Federal Reserve's announcement of Operation Twist. It was a fitting moment in that investors have been twisting in the wind for most of the year. The stark acknowledgement by the central bank that the economy faced significant downward risk sent investors and traders to the exits.

Things calmed down a bit on Friday, and the market opened mixed on Monday morning. Stocks are trading slightly higher, but one gets the sense most participants are shell shocked at the moment. Could this be the sign that we are truly in a bear market? If we get more weeks like last one, investor spirit may be irreparably broken.

For those who haven’t given up entirely, trading is the way to go. Get in the market, then get out quickly. Most important, be selective. I maintain that companies reporting earnings provide just such an opportunity. Look no further than last week’s impressive move by Nike (NKE) after it reported earnings.

The key to being a selective trader is to find business models that are working or likely to work in current circumstances. We know times are tough, and they're likely to be tough for a fairly long time. On the retail side, I like companies that make money on low prices and convenience.

That means looking very closely at Walgreen (WAG) as a trading opportunity in advance of the company's earnings announcement for the quarter ended Aug. 31. For three out of the last four quarters, Walgreen has beaten Wall Street average estimates for profits. For the most-recent quarter, the average estimate is for the company to make 55 cents per share -- a penny higher than the estimate was 90 days ago.

This quarter also marks the end of the fiscal year for Walgreen. Wall Street expects the company to post a profit of $2.62 per share. In the next fiscal year, earnings are expected to grow by 14% to $2.99 per share. At current prices, shares of Walgreen trade for just 13 times current fiscal-year earnings estimates.

In this environment, low prices and convenience can be expected to be rewarded by a premium valuation. If Walgreen reports strong earnings on Tuesday, shares of should appreciate nicely after the news.

Walgreen is one of the 2011 Dividend Aristocrats -- stocks that have increased their dividends for 25 or more consecutive years.

Paychex

If you want to short stocks in these choppy seas, seek out the businesses likely to struggle. Given high unemployment and challenges for many small companies across the country, those business providing services to that important segment of the economy are likely to find fewer customers. Paychex (PAYX) provides human resource and accounting services to small businesses. The company reports results for the quarter ended Aug. 31 on Tuesday after the market close.

Over the last year, Paychex has chugged along, more or less in line with Wall Street profit estimates, and shares trade for a bit less than where they stood a year ago. For the current quarter, the average estimate is for the company to make 38 cents per share.

For the full year ending May 31, 2012, the company is expected to make $1.50 per share. Profits are expected to grow at a paltry 9% in the next year to $1.64 per share. At current prices, Paychex trades for a whopping 17.5 times current fiscal-year estimated earnings.

Some say stocks have fallen too far, but that's not the case with Paychex. With a reasonable likelihood that the company reduces guidance for the future, this stock could take a bath after it reports results on Tuesday. I would sell this one short.

Technology stocks are seeing a disproportionate share of selling compared with other sectors. Fears of a double-dip recession weigh on this group more as consumers and corporations reign in spending. Shares of Jabil Circuits (JBL) have fallen 18% since the middle of July. We’ll get a sense of how justified that selling was when the company reports earnings results for the quarter ended Aug. 31 on Tuesday.

Jabil has beaten Wall Street average estimates in each of the last four quarters, but that doesn't erase concerns for the company's most-recent performance. For the quarter to be reported, the average Wall Street estimate is for Jabil to make 56 cents per share.

Jabil’s fiscal year also ended on Aug. 31. The average Wall Street estimate for the year is for the company to make $2.29 per share. In the next year, earnings are expected to grow 5% to $2.41 per share. At current prices, shares of Jabil trade for just 7 times earnings.

Current estimates would seem to already reflect a slowing global economy. With shares trading for such a low valuation, I would trade Jabil on the long side. The downside has already been priced into this stock.

If discounts are working in the retail sector, nothing says "discount" like Family Dollar (FDO). The company has already benefited greatly from the anemic growth out of the last recession and is poised for more growth as the economy stumbles going forward. On Wednesday, the company reports earnings for the quarter ended Aug. 31.

Over the last year, Family Dollar’s operating performance has been mixed. The company has actually missed average Wall Street estimates in two of the last four quarters. Despite that performance, shares of Family Dollar are only slightly lower than their 52-week high of $54.68 per share. For the most-recent period, the average Wall Street estimate is for Family Dollar to make a profit of 63 cents per share. That estimate is slightly lower than it was 90 days ago.

For the full year also ended Aug. 31, Family Dollar is expected to make $3.09 a share. That number is slated to jump 16% to $3.58 per share the next year. At current prices, shares trade for 17.5 times current-year estimated earnings.

Given the fertile business environment for discounted retail goods, I expect Family Dollar to beat earnings estimates. The market is rewarding companies that are growing, as we saw with Nike’s report last week. With a strong report here, Family Dollar shares could gain 3% to 5% in the trading day after the report is released.

Part of being selective includes being careful to avoid the value trap. With many companies trading for valuations that appear to be compelling, a closer look reveals that more downside risk is possible and in some cases is probable. Case in point is Micron (MU), which reports earnings on Thursday for the quarter ended Aug. 31.

Forget about waiting for the train wreck of a double-dip recession, Micron’s pattern of operating results over the last four quarters is already a mess. The company has missed average Wall Street estimates badly in three of the last four quarters. In the quarter ended May 31, the company made only 7 cents per share when the expectation was for a profit of 16 cents per share.

No wonder shares of Micron are down nearly 50% since the end of April. Despite the losses, Micron at more than $6 per share is well above the dollar-and-change share price reached when stocks bottomed in March 2009. For the fiscal year ended Aug. 31, 2012, the average Wall Street estimate is for the company to make 56 cents per share. At current prices, Micron trades for just 12 times forward earnings.

That is a value trap in my opinion. 90 days ago, the estimate for the next fiscal-year profits was at $1.21 per share. The high variability in the numbers shows just how uncertain things are in the market. Micron tends to be a commodity product and in a slowing economy commodity prices fall

I would sell this stock short heading into earnings. There is more darkness to come at Micron.

At the time of publication, author had no positions in stocks mentioned.

Jamie Dlugosch is a founder and contributor to MainStreet Investor and MainStreet Accredited Investor. Formerly, he was president and CEO of Al Frank Asset Management. He has contributed editorially to The Rational Investor, The Prudent Speculator, Penny Stock Winners and InvestorPlace Media.